Electrifying Profits from Car Prophet

Some people can talk the talk, and others can walk the walk. Well, Shai Agassi is a walker, and this 42 year old wunderkind has a modest goal: change the world radically by 2020. For a youngster who moved to California in 1995 to partner with Apple Inc. (AAPL), and who subsequently sold a company for $110 million before becoming first in line as next CEO at software giant SAP, no idea is too big for Agassi.

Electrifying Idea

When faced with the challenge to crush the world’s polluted addiction to oil powered cars, it didn’t take long for Israeli President Shimon Peres to convince Agassi there actually is a way to convert the world’s 600 million carbon-dirty, gas guzzling cars to electric vehicles (EVs). In 2007 Agassi quit his job at SAP and formed his new electric vehicle company, Better Place.

Better Place’s first challenge is converting two million cars to electric in Israel to get the ball rolling. Before executing this electrifying idea, Agassi needed to raise capital and secure a major auto manufacturing partner. In 2008, after knocking on all the major car makers’ doors at the World Economic Forum in Davos, the only person to answer was Carlos Ghosn, CEO Renault-Nissan Alliance. Not only was Ghosn committed to becoming a partner with Agassi, but Renault-Nissan was willing to pony up over $1.5 billion in capital to see the vision turn to reality.

The problem is fairly obvious. The U.S. imports about 2/3 of its oil, which translates into about $1 billion per day. Even if you are not a tree-hugger and do not care about the 33% of the country’s CO2 spewed into the air by cars and trucks, our ballooning trade deficits and our financing of countries harboring terrorists are reasons enough to move towards oil independence. So far, the introduction of hybrids has been a feeble attempt of denting the 98% of transportation vehicles powered by oil. The Toyota Prius has been around for about 15 years and hybrids have gained less than 2% of the overall automobile market share. For the electric car market to really take off, electric cars must cost $5,000 less than a comparable gas guzzler and also be just as, if not more, convenient and fast according to Agassi. What makes this oil addiction even scarier is the finite nature of this depleting resource. Fortunately the same cannot be said about alternative energy – we have virtually endless amounts of wind, solar and other biofuels.

The Solution

When it comes to politics, it was James Carville who famously quoted “It’s the economy, stupid” when referring to the 1992 Presidential election between George H.W. Bush and Bill Clinton. In other words, citizens vote with their wallets. Agassi feels the same way about consumers when it comes to car purchases. At the end of the day, car buyers vote with their wallets too and will not pay more for a car just because it is environmentally designed.

Better Place believes electric cars need to be $5,000 cheaper, faster, and more convenient. In forming the company, Agassi took a page from the cell phone industry in order to make his dream become a reality. Rather than sell a traditional hybrid car to consumers for a premium (like $35,000-$40,000 for a Prius), Better Place is subsidizing the hardware (i.e., phone or car) to attract the mass market buyers and then charge for the usage (i.e., collect for the minutes used or miles driven). If Agassi can execute this cell phone-like subsidization model, he is confident that 98% of car buyers will move to electric vehicles – predominantly for the reason of saving money (not altruism).

Logistically, a Better Place will design a network of “charge spots” that are placed across the country at workplaces, in public parking lots, and along urban streets so that EV drivers have convenient access to energy in addition to their homes. In addition to the charge spots, Better Place will also be installing “switching stations” that resemble car washes. At the switching stations, EV owners drive in and have drained batteries automatically replaced with fresh ones.

Besides environmental benefits, how would Agassi’s Better Place technology stack up on cost, speed, and convenience?

EV is Faster: An electric car is two-times faster on acceleration versus a traditional combustible engine car equivalent. The electric car may not reach the top speeds of traditional gasoline cars, but out of the gate, EVs can leave traditional cars in the dust. Since EVs have no gears, instant acceleration is achieved.

Improving Battery Technology: The cost of lithium-ion batteries has come down by over 75% in the past decade, creating a cost-effective, high-performance solution for EVs. The batteries are expected to perform for over 8 years and 2,000 recharges. If each charge gets 100 miles, the battery is projected to last 200,000 miles.

Declining Cost Curve: Battery technology is improving at the pace of Moore’s Law, which means a doubling of battery performance every two years (i.e., speed, power, and battery life). For example, over the last 35 years battery life has traditionally doubled every 5-7 years. Now, the cost per unit of energy and number of cycles on a battery is doubling every two years. The consumer benefits because some of the cost savings are passed on to lower the cost of the car. On a total cost per mile basis, the cars built for Agassi can be 70% lower than a gas-powered vehicle in some markets, even after accounting for the amortized cost of the battery.

Convenient Networks: The most common type of charge spot will provide a standard charge, which will take anywhere from 4-8 hours to fully recharge a typical EV lithium-ion battery, depending on the amount of charge remaining in the existing battery. As far as battery switching, in many cases the process will take less than a minute. At a minimum, there will be no more trips to gas stations and since Better Place will be selling miles to the EV owner, there will not be the traditional volatility in gasoline prices.

As mentioned previously, Better Place is leaning on Renault-Nissan to make this vision become a reality. Better Place has chosen to use Renault’s larger Fluence model in the full-scale Israeli network rollout. In total, Renault-Nissan is committed to rolling out nine different car models and producing 100,000 electric vehicles in the first year.

The Future

As stated earlier, Agassi walks the walk when it comes executing his vision. Besides Israel, Better Place has secured commitments from Denmark, Australia, Japan, Canada and the U.S. In the U.S., electric car networks will be built in Hawaii and California with further expansions in the works.

Agassi is not afraid to talk the talk either. Here are several bold predictions as it relates to the Israel network build out: 1) The nationwide Israeli network will be operational by January 1, 2012; 2) By 2015, more than 50% of new cars sold in Israel will be electric; and 3) By 2017 about 90% of new cars sold will be electric.

His bold predictions don’t stop there – he believes this technology will spread like wildfire. For instance, in 10 years he believes China will make and sell 40 million electric cars per year and the electricity for the car batteries will be generated from rings of solar power (not coal) surrounding various Chinese cities.

Shai Agassi has accomplished a lot in his young professional career, but his ambitions have grown even grander. So far he has been able to walk the talk, and if he is able to pull off this miraculous global electric vehicle conversion by 2020 as he plans, this is one electric prophet you do not want to ignore.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, but at the time of publishing SCM had no direct position in SAP, Renault-Nissan, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

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